As a regular user of Xero (across several industries and entities) and someone who previously bought in RL based on a solid track record, my bear case is somewhat anecdotal, but… 

The thing I simply cannot get past is Xero’s apparent unwillingness to make their product better for users.

There are a lot of things to love about using Xero, including its quick deployment, flexibility, integration options and appeal to non-finance folk. As a finance person though, you quickly see that there are gaping holes in its capabilities which, frankly, should not exist in an accounting system designed to help with producing compliant financials for busy business owners. 

To name just a few basic things that Xero should do but doesn’t:

• Let you revalue or impair a fixed asset. 
• Provide a function for you to accrue annual leave and LSL on balance sheet without manual entries (very worrying as a payroll system) 
• Facilitate smoothing of revenue (deferred revenue) - particularly worrying based on the number of SaaS businesses that are using Xero.

The result? A whole bunch of SMEs spitting out financials that don’t comply with accounting standards and require business owners to pay more in the form of advisors and external plug-ins than they should need to. (If they even realise they need to) 

Why this relevant to my divestment decision today (hence "Bear case" and not "Innuendo goes on a rant"):

• There are heaps more things like the above which prevent Xero from being a great system that they are actively choosing to ignore - there are loads of (mostly unanswered) support & feature request threads going back years pointing them out. 
• From a finance perspective I don't feel like there have been any meaningful changes/updates to Xero from a functionality and general UX perspective in ages.
• Competitors are doing some of the basics a lot better, which I think helps to explain slow growth in jurisdictions with a heavier compliance focus (e.g. USA).

Ultimately I feel that Xero is ripe for disruption by a competitor who can bring rapid innovation (so much AI potential in this space) to the table and do the basics right. The SaaS/tech space - much of a market which Xero commands - is the perfect beach head for a new competitor because there is so much functionality that could be there which isn't.

I used to be of the opinion that Xero had a sizeable moat being that it can be cumbersome to change accounting systems. On reflection this doesn't carry as much weight for me anymore because:

• By definition the bulk of Xero's customers tend not to have really complex accounting setups nor long histories of records kept
• With technology available and a touch of customer care, a smart competitor could make the onboarding process nearly automatic.
• SaaS users can be fickle in general and I could see some initial churn (following said disruption) gaining a lot of momentum.

Call me a cynic, but at the current valuation and in the absence of some real tangible product improvement, I can only see downside for Xero...

Disc: Held IRL but probably not for much longer.